NASAA: Advisers have begun prepping for threshold switch

Like many aspects of the financial-regulatory-reform legislation that became law July 21, the provision that increases the threshold for state regulation of investment advisers doesn’t go into effect for another year.

Financial advisers, however, are already trying to determine how the change will affect their businesses, with many seeking guidance from the North American Securities Administrators Association Inc.

“We weren’t expecting them to raise questions so early,” said Patricia Struck, administrator of Wisconsin’s securities division and chairwoman of NASAA’s investment adviser section. “They want to be prepared.”

Under the new law, advisory firms that manage assets of up to $100 million will fall under state regulation. Those with more than $100 million in assets will be overseen by the Securities and Exchange Commission.

Currently, states regulate only advisers that manage up to $25 million.

The most frequently asked question so far, according to Ms. Struck, is: Can advisers register with their state immediately or do they have to wait? The second most popular is: Will they have to pay two fees?

The answers to both, as well as to many other queries, follow a similar theme.

“We’re working with the SEC to develop a protocol for that,” Ms. Struck said.

The intense interest is adding momentum to NASAA’s effort to communicate with advisers about the change. It is developing a transition plan that covers legal, operational and adviser database issues.

NASAA officials consider the most important component to be outreach. The organization is devoting an entire session at its annual meeting in Baltimore late next month to the “switch,” as it is being called.

Concerns have cropped up at recent events as well. David Tittsworth, executive director of the Investment Adviser Association, recently appeared in a TD Ameritrade Inc. webcast in which many questions revolved around the transition.

About 36% of the 400 participants were advisers that manage assets of between $25 million and $100 million, he said.

Mr. Tittsworth couldn’t serve as an oracle that day. “There are no complete answers right now,” he said.

The provision clearly is meant to ease the burden on the SEC, which is taking on additional responsibilities for monitoring hedge and private-equity funds. The change in the AUM registration threshold is expected to move an estimated 4,000 advisers from SEC oversight to the states.

Currently, the SEC doesn’t focus on smaller advisers very often. The SEC examines about 10% of advisers overall annually.

Denise Voight Crawford, Texas securities commissioner and NASAA’s president, said that more than 3,000 advisers have yet to be reviewed. “We’re excited about getting to examine some of these investment advisers who have never been examined before,” she said.

Skeptics wonder whether state regulation will be any more effective for smaller advisers than SEC oversight. Gilbert Davis, a partner at Sims Moss Kline & Davis LLP, pointed out that many states are struggling with substantial deficits. Georgia tried to close its budget gap last spring in part by laying off securities regulators.

“A lot of states aren’t gong to be able to step up and handle the increased workload,” Mr. Davis said. “You’re going to have this shift in burden without an offsetting decrease in responsibility, as you have with the SEC.”

One of the people laid off in Georgia’s securities division downsizing said the state is consolidating investment adviser registration under the professional licensing board, which handles positions such as nurses, accountants and security guards.

But Em Walker, former director of securities registration and licensing, said the belt-tightening won’t undermine Georgia’s ability to take on more investment advisers, because the state is increasing its examination staff.

Regulation will come only in response to investor complaints, rather than being preventive in nature, according to Mr. Davis.

“You’ll end up with a situation where [examinations are] even less frequent or non-existent in a substantial portion of the states,” Mr. Davis said.

One place where the transition could be murky is New York. Under state law, investment advisers are registered with the state securities office but are examined by the attorney general. Language in the financial-reform legislation states that advisers must register with and be examined by the securities commissioner, leaving it unclear if the 350 or so New York investment advisers with assets between $25 million and $100 million will remain with the SEC or transfer to state oversight.

Thomas Devaney, a partner at Morrison & Foerster LLP, also maintains that states have fewer resources to devote to investment adviser regulation.

He said that registration with the SEC takes weeks. Recently, registering a hedge fund client in California, where state workers have been furloughed, took four months.

Mr. Devaney encourages advisers to take potential delays into account and act sooner rather than later to determine whether they have to register at the state level. For instance, an adviser who has an operation requiring registration with 15 or more states can remain with the SEC.

“Advisers will want to look at this before the year is out,” Mr. Devaney said. “They don’t want to wait until the last minute. You don’t know how long [state registration] will take.”

Ms. Struck and Ms. Crawford contend that securities oversight is a regulatory priority for states and won’t suffer under their jurisdiction.

“No one is worried about [the transition],” Ms. Crawford said. “It’s the same thing we’ve been doing; it’s just more of them.”

E-mail Mark Schoeff at [email protected].